Questions on Romney’s proposal to cap tax deductions

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By Alan Wirzbicki and Callum BorchersGlobe Staff and Globe Correspondent
October 05, 2012

Pressed during Wednesday’s presidential debate to explain how he would pay for the huge income tax cut he has proposed, Mitt Romney said he would consider a cap on the amount of charitable donations, home mortgage interest, state and local tax payments, and other expenses taxpayers can claim on their returns.

“Make up a number, $25,000, $50,000. Anybody can have deductions up to that amount,” he said.

Long criticized by President Obama, Democrats, and policy analysts for failing to offer details on how he could fulfill his promise to cut income tax rates by 20 percent without increasing the budget deficit, Romney has only floated the deduction limit this week. Two days before the debate, the GOP nominee told a Denver television station he would consider an overall limit of $17,000.

The Romney campaign has characterized a limit on deductions as just one of the options Romney might pursue if he is elected. Tax analysts said it is difficult to evaluate the idea, since Romney has provided few details and has tossed out several dollar figures as a potential cap. But critics say such a cap could be problematic in two significant ways: It would increase the tax burden on many middle-class taxpayers and it would not make up for the roughly $5 trillion in federal revenue over 10 years that would be lost in Romney’s plan.

Some owners of homes with high mortgages and residents of Massachusetts and other states with high income or property tax rates would be particularly vulnerable, tax analysts say.

About 30 percent of taxpayers itemize their deductions instead of taking the standard deduction of $11,900 for married couples filing a joint return or $5,950 for individuals. Itemizing, which reduces the amount of taxable income, is especially widespread among middle-class and wealthy taxpayers.

Citizens for Tax Justice, a left-leaning think tank, calculated that a $17,000 limit on deductions, even if combined with Romney’s proposed 20 percent tax cut, would result in a tax bill for households with income between $35,000 and $190,000 that was an average of $1,700 higher, said Robert S. McIntyre, the group’s director.

People in higher income brackets itemize the most and would bear the brunt of the limit. But the wealthy would also stand to benefit the most from Romney’s proposed 20 percent tax cut, said Roberton Williams of the Tax Policy Center, a nonprofit, nonpartisan group.

“The question is, how much do you get back from this? You’ll get a disproportionate amount back from the wealthy, but they still may come out ahead,” he said.

Williams said the center was working on an estimate of how much revenue a cap on deductions would raise. But he added that the center’s earlier studies showed that even getting rid of all deductions would not create enough revenue to offset the impact of the Romney tax cuts.

Since Romney offered a window into his tax strategy, conservative analysts at the American Enterprise Institute and the Heritage Foundation have emphasized that only a minority of taxpayers would be affected by a limit and that Romney would have other strategies to help offset his cuts.

In an interview on MSNBC on Thursday, Romney campaign surrogate John H. Sununu said all deductions were on the table. Romney advisers also insist some of the revenue gap would be closed by a boost in economic activity generated by the tax cuts.

Getting rid of tax breaks as a way to raise revenues, cut the deficit, or offset tax cuts has been discussed by both parties for years. President Obama backed a plan that would limit itemized deductions to 28 percent of gross income for individuals earning more than $200,000 annually and families earning more than $250,000.

Williams said that in isolation, limiting deductions could be a way to increase the taxes paid by the wealthy.

“It’s a very progressive way to raise taxes,” he said. “Only 30 percent of us itemize. The likelihood of itemizing goes up as your income goes up.”

But many deductions enjoy strong popular support, and Obama’s plan met significant resistance. Realtors back home-mortgage deductions, which encourage home-buying by lowering the effective cost of mortgages. Allowing people to deduct state taxes serves as an indirect subsidy to state governments. And charitable exemptions for donations are a boon to nonprofits, which have lobbied vociferously in the past against limits to deductions.

Sidestepping a fight over the specific deductions to cut might be a smart strategy for Romney, said Pietro S. Nivola, a senior fellow in governance studies at the Brookings Institution.

“It avoids a case-by-case dispute over each individual deduction, some of which are very popular and are political sacred cows,” he said.

Floating the cap serves two purposes for Romney, Nivola said: It provides “cover in campaigning,” since he’s been dogged for specifics, and it’s a “good strategy for the legislative process,” if Romney wins the White House.

Nivola said he could envision a compromise between Romney’s dollar-figure cap and the percentage-of-income cap suggested by Democrats.

“This shows good faith about being serious about curbing deductions. It was important for Romney to establish that for his credibility,” he said.

George K. Yin, chief of staff of the Joint Commission on Taxation from 2003 to 2005 and now a professor at the University of Virginia School of Law, agreed:“It’s a good strategy because we’re talking about extremely sensitive items — the mortgage interest deduction or the charitable contributions deduction — so this is a nebulous cap that lets you say to taxpayers, ‘We’re not taking away any deductions. We’re letting you fill up this bucket however you want.’ ”

Yin noted the overlap between the Romney and Obama proposals. “The similarity is more than coincidental. It’s clearly strategic,’’ he said. “Both want to limit the government’s tax expenditures, these deductions that have started eroding the tax base.’’

For taxpayers wondering how the limit Romney mentioned might affect them, Mark Misselbeck
, an accountant at Katz Nannis & Solomon in Needham, said the impact for individuals was difficult to judge without knowing whether other changes Romney has proposed would be enacted.

In a back-of-the-envelope calculation, he said that if Romney cuts rates by 20 percent and limits deductions to $17,000, but everything else remained the same, a four-person family with a pretax income of $80,000 and a $320,000 home mortgage would see a reduction of their overall tax bill by several hundred dollars.